OVERVIEW OF THE FINANCIAL YEAR’S RESULTS The result for 2005/06 of $15.774m was down on the previous year by 4.1%. This result was achieved against a back drop of very difficult trading conditions especially in Australia during the last three quarters of the year. The impact of higher interest rates, rising petrol and gold prices all combined to dampen discretionary spending in Australia.This was particularly the case in New South Wales and Victoria.

After a record profit in 2004/05 the company pushed on with significant store growth during 2005/06 resulting in 23 new stores being opened and 2 non performing stores being closed. However a drop in same store sales in Australia of 1.3% combined with additional store costs and an increase in support centre costs due to infrastructure changes, compounded to pull our profit down for the year.

The centralisation of our Australasian supply chain in 2004/05 which includes the buying function, warehousing and distribution, made the supply chain more efficient during 2005/06.The Canadian company's warehouse and distribution functions were centralised to Australia in late 2005, completing our global supply chain strategy. This strategy will deliver savings over time due to economies of scale and allows the country management teams to be more focused on our core retail activities, while allowing the support services team to focus on providing the appropriate products and services to our international retail network. This strategy has resulted in increasing the speed and frequency of stock replenishment to all stores from our Brisbane warehouse.We have developed systems to deliver this centralised model which encompasses multi-currency and multi-country as well as automated customs and duty capabilities.

With this work now complete, we can focus more effectively on sourcing of our product ranges in order to maximise margins from improved buying power and streamlined processes.
During the year, the company also made some significant decisions with respect to our product ranges to assist in positioning the brand further from our competitors.

The first strategy was to increase our range of diamond rings and jewellery which we view as an important and growing part of our business. However this has resulted in an increase to our inventory levels in order to grow the categories and to allow for new product launches while the discontinued ranges are cleared.

The second decision was to discontinue most of the major watch brands we have held for many years. The company has chosen to build further on the success of our own Michael Hill brand and in the coming twelve months will roll out a full range of Michael Hill watches which will enable us to achieve improved margins and respond to fashion trends more rapidly.

SEGMENT RESULTS
In 2004/05 the company redefined its geographical reporting segments to better reflect the financial performance of each segment.The segments now reported on reflect the performance of the company's retail operations in each geographic segment and exclude non-core retail activities such as manufacturing, wholesale and distribution, as well as other general corporate expenses. In the segment tables below, the operating surplus numbers for 2002 and 2003 have not been restated.

AUSTRALIA - A TESTING YEAR

Our Australian operation struggled for revenue over the last three quarters of the 05/06 year due to a tightening economy and also due to margin erosion from rising world gold prices. In Australian dollars, total sales increased 10.2% to AUD$177,477,000 and same store sales fell 1.3%.The operating surplus decreased 14.4% to AUD$13,952,000 and represented 7.9% of sales (2005 - 10.0% of sales).

Sixteen new stores were opened in Australia during the year and two non performing stores were closed. During the financial year we established our first stores in to Adelaide in South Australia. The sixteen new stores were opened at:

• Innaloo, Western Australia
• St Ives, Sydney, NSW
• Merrylands, Sydney, NSW
• Elizabeth Shopping Centre, Adelaide, South Australia
• Glendale, Central Coast, NSW
• Plumpton, NSW
• Southgate, Sydney, NSW
• Bayside North, Frankston,Victoria
• Helensvale, Gold Coast, QLD
• Arndale, South Australia
• Mandurah, West Australia
• Tea Tree Plaza, South Australia
• Wetherill Park, Sydney, NSW
• Colonnades, South Australia
• Southland, Victoria
• Karingal, Victoria

The company still has significant expansion opportunities left in Australia and we feel confident that at least forty more stores can still be opened in Australia which provides the group with excellent growth prospects in the future.

Our priority this year is to lift performance in our existing store base.

NEW ZEALAND'S PERFORMANCE STEADY

New Zealand's performance during the year was very pleasing with total sales increasing 4.3% to $91,036,000 and the operating surplus up from $10,044,000 to $10,180,000.The surplus as a percentage of sales was slightly down on last year at 11.1%.

Two new stores opened in New Zealand during the year at Richmond in the South Island and at Whakatane in the North Island.

Our focus in New Zealand in 2006/07 is to continue to work on lifting the performance of the existing store base. We will do this through continued concentration on the basics which drive our business and through our improved product mix and ranges.

CANADA EXPANDS TO ALBERTA

Total Sales in Canadian dollars grew by 57.2% to C$12,223,000 and same store sales increased by 6.9%. The seven stores that traded for the full year reached average sales of C$1,314,000 per store, which is very encouraging. The operating loss in Canada improved from C$767,000 to C$746,000.

This static bottom line result reflects our move to strengthen our management resources in Canada including the appointment of an additional Regional Manager to facilitate our expansion into Calgary in the province of Alberta.

During the year we opened a further five new stores in British Columbia and Alberta. These were in the following centres;

• Sunridge Mall in Calgary, Alberta
• Cottonwood in Chilliwack, British Columbia
• Woodgrove in Nanaimo, British Columbia
• Richmond Centre in Vancouver, British Columbia
• Cherry Lane in Penticton, British Columbia

In the current financial year we plan to open a further six new stores in British Columbia and Alberta.

Although we are still progressing cautiously we believe Canada has an exciting future and should reach break-even in the 2006/07 year.

INTERNATIONAL FINANCIAL REPORTING STANDARDS
Michael Hill International Ltd adopted these standards early and reported for the first time under these standards for the year ended 30 June 2006.

Comparative information presented in the financial statements has been restated to conform to the requirements of the new standards, and the financial impact of that adoption has been disclosed.

OUR PRIORITIES
Our main priorities for the 2006/07 financial year are as follows:

• To deliver a return on average shareholders funds in excess of 25%
• To open a further 20 stores across the three markets.
• To increase our same store sales and EBIT particularly in Australia.
• To reach a breakeven result in Canada.

THANKS TO AN INCREDIBLE TEAM
This year proved to be one of the more challenging years we have ever faced. Trading was difficult at best, however our team rose to the challenge and produced a very admirable result while positioning the business well for any up turn in economic conditions. I would like to thank each one of our dedicated team, now totalling over 1,800 people across three countries. Each one of them shares our vision passionately and makes it a reality every day on the shop floor, where it counts. Congratulations on meeting the challenges we have faced this year and thank you for your contribution to our continued success.

M.R. Parsell
Chief Executive Officer